• October 2019
    M T W T F S S
    « Sep    

My board is aggressively steering the company into an unnecessary round of funding that would wipe out the founders. How can I stop them?

You need to evaluate your position – your rights, responsibilities, and liabilities – immediately with guidance from your own attorney. The duties and obligations of corporate legal counsel are owed to the corporate entity – not to you or any individual. Since it’s not unusual for there to be a conflict of interest between a corporation and an officer, director or employee, it’s best not to discuss any of your confidential information – especially as it relates to potential litigation – with corporate counsel, funders or BOD members.

Prior to speaking with an attorney, gather all of your organizational documents. Do you have an Operating Agreement? If so, you need to read it and figure out what your responsibilities are and whether you’ve been satisfying your own obligations. Spending $50k on organization documents alone sounds exorbitant. However, organizational documents often do consist of Operating Agreements, executing a Series A, patent and trademark applications, Confidentiality Agreements, and supplemental contracts (e.g., related shareholder agreements), adding significantly to start-up costs. Make sure you collect every single one of these records so that your lawyer can properly advise you on your legal rights.

One take-away from your experience is to be aware that angel funding is expensive money with lots of strings attached. Because angel investors are offering private funding, they’re taking huge risks and therefore expect huge returns.

A common tradeoff of obtaining start-up capital from angels is giving away some of your power for desperately needed cash. Angels don’t tend to just write checks and fade into the background – although there are some angels who do act more as guardians than as dictators. Angel funders own part of your company, and since they themselves are entrepreneurs – typically with some expertise in your product area or industry – they expect to exert a considerable amount of control over your business, which they are fueling with their own cash.

Since start-ups tend to be cash-starved, they’re often willing to surrender a huge chunk of their authority – and their vision. Bending your own unique business model to satisfy the demands of funders and conform to their vision is rarely advisable, but almost always a condition of accepting their funding.

As far as it taking a year to reach this point, that’s not necessarily all that unusual. It all depends. In your case, you say that it was just a year ago when you started to pitch to these guys. How long did it take them to conduct their due diligence and research your business? When did they actually release the funding? What is the effective date of the organizational documents?

From your post, it sounds like it was less than a year ago, which may be reasonable since angels aren’t banks. They’re assuming enormous risks, so it’s common for funding to take longer than with a traditional bank.

A thorough review of the all the organizational documents might reveal that your angels did more than grease the skids to move your business along; you could’ve surrendered more than you realized. But you won’t know for sure without first seeking competent legal advice – immediately. No one likes spending money on lawyers, but with the right attorney to guide you, it’s an investment that can provide tremendous ROI in saving you more money down the road.

Hope that helps guide you in the right direction. Feel free to check out LawTradesto discuss this further with experienced startup attorneys for additional help understanding your rights and options.

Don’t hesitate to message me if you have any further questions!